Trusts are commonly used to shield family assets from business-related risks and third-party creditors, but it’s a common misconception that the same level of protection extends to protecting assets in case of a marriage or de-facto relationship ending.
Trusts can be vulnerable to attack from a former spouse or de-facto partner. Being aware of these vulnerabilities and implementing extra safeguards, before it’s too late, can prove to be extremely valuable.
Property (Relationships) Act 1976
The Property (Relationships) Act 1976 (PRA) can apply to trust property in limited circumstances, including under sections 44 and 44C of that Act.
This section applies where a person has disposed of property (including to a trust) in order to defeat the claim or rights of any person under the PRA. It will not apply where the party receiving the property did so in good faith and for adequate consideration.
If s 44 applies, the Court may order that the property be transferred back, or that the person who received the property (i.e. the Trustees) pay compensation to satisfy a spouse or partner’s rights to relationship property.
Even if there were genuine commercial motivations behind the transfer taking place, such as where a home is transferred into a Trust ahead of a new commercial venture to safeguard it from business risk, s 44 could apply. If a spouse or partner is not a beneficiary of the Trust that is receiving the home, and is not strictly able to benefit from it in the future as a result of the structuring (due to not being a beneficiary), s 44 will most likely apply.
An “intention to defeat the claim or rights of another person” can exist even very early into a new potential relationship, although that new relationship would still need to develop into a more fulsome relationship (one that is subject to the PRA) before the rights of the spouse/partner would solidify.
This section applies to dispositions of property to a Trust, during the course of a relationship, that has the effect of defeating the claim or rights of a spouse or partner in circumstances where s 44 (discussed above) does not apply. There is no need to prove an intention behind the disposition.
Section 44C requires several elements to be met:
- the property disposed of must have been relationship property (as defined in the PRA);
- the disposition must have been made after the relationship began; and
- the disposition must defeat the claim or rights of one of the partners.
This means dispositions to a Trust of “separate property” are not captured, and neither are dispositions made in contemplation of a relationship (but before it commenced). However, care will still need to be taken to ensure no relationship property is then applied towards those separate assets.
A common example is an investment property, acquired prior to the start of a relationship that has personal income applied towards repayment of a mortgage during the relationship. In the absence of a formal Relationship Property Agreement that provides otherwise, personal income of spouses/de-facto partners would be classified as “relationship property” under the PRA.
Mortgage payments sourced from relationship property income towards repayment of a Trust’s mortgage could constitute a disposition of relationship property for the purposes of s 44C, if it has the effect of defeating the claim or rights of a spouse/partner.
If section 44C applies, the court has the power to make one spouse/partner compensate the other. This compensation could be sourced from either relationship property or separate property. Alternatively, the court could order the trustees of the trust to pay the affected spouse/partner compensation from the Trust’s income. There is, however, no power to order that property be recovered from the Trust Fund.
Family Proceedings Act 1980 – Section 182
This section 182 can, in the right circumstances, provide Courts with wide powers to vary the terms of nuptial settlements (including trusts) when a marriage or civil union comes to an end. This could include varying, amending or resettling a trust in favour of one of the parties, or for the children of the marriage.
Generally speaking, a “nuptial settlement” is a settlement that makes some form of continuing provision for both or either of the parties to a marriage, in their capacity as spouses (with or without provision for their children). The settlement should provide for the financial benefit of one or both of the spouses.
For example, where a family trust has been set up during a marriage with one or both spouses included as beneficiaries, there will almost always be a sufficient connection to constitute a nuptial settlement. Even trusts formed prior to a relationship could include reference to a “future spouse” being among the beneficiaries.
If a trust is found to be a nuptial settlement, and there is a disparity between the benefits a spouse would have expected to receive (had the marriage continued) contrasted against what they will receive now that the marriage is over, then the Court can make such orders as it deems necessary to remedy that disparity.
A “constructive trust” is a trust that arises by law and, if established, can be used to remedy an unjust situation that arises where one spouse or partner to a relationship does not have legal ownership of property (such as a home owned by a trust), but has contributed towards that property, either directly or indirectly, over the course of the relationship.
In order to establish a constructive trust claim, a spouse or de-facto partner will need to show:
- That they have made direct or indirect contributions to the trust property (which do not have to be financial);
- That they had an expectation of benefitting from the trust property;
- That expectation was reasonable; and
- That the Trustees of the recipient trust should reasonably expect to surrender an interest to the spouse or de-facto partner.
If a constructive trust can be established, the Court will intervene to prevent the Trustees being unjustly enriched by the contributions and require compensation to be made to the value of the contributions.
If you have formed a trust and are unsure of the extent to which the assets of that Trust may be protected in the event your relationship ends, the best way to protect yourself is to enter into a binding Relationship Property Agreement with your spouse/partner that complies with the PRA.
Ideally, specialist advice should be sought before transferring assets into a trust, rather than assuming the transfer will be fine and the assets are safe. It is far easier and more cost effective to obtain specialist advice at the outset, to protect your assets in these situations.
Special thanks to Partner Lisa Small and Associate Jonathon Russell for preparing this article. If you have any questions about entering into a relationship property agreement, please contact a member of our family and relationship team.
Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.